How to Read Marginal-Rates Charts

March 17, 1985

Beginning this year, the personal income tax system is "indexed" to prevent taxpayers from being pushed into higher tax brackets even when their real or inflation-adjusted incomes do not rise. In the past, periodic tax cuts accomplished the same purpose, though less uniformly among taxpayers. When the Reagan administration proposed first a 30 percent and then a 25 percent cut in tax rates, it said that inflation-caused bracket creep was one reason for the nation's economic ills.

The charts show marginal tax rates -- the share paid in taxes of income falling into a taxpayer's highest tax bracket. All taxpayers pay different rates on different portions of their taxable income. For instance, this year a single individual will pay no tax if his taxable income is $2,390 or less. If his taxable income is $3,540, he still will pay no tax on the first $2,390, but will pay at an 11 percent rate on the extra $1,250. The next bracket runs from $3,540 to $4,580, and the marginal rate is 12 percent -- and so on up through the income brackets to the top rate of 50 percent.

The income levels shown are for adjusted gross incomes (AGI) of constant real purchasing power rather than for taxable income, which is equal to AGI less deductions and personal exemptions. The four AGI levels shown for 1981, when the Reagan tax cuts were passed, are $12,500, $25,000, $40,000 and $500,000. In real terms, the equivalent of $12,500 in 1960 was only $4,390. Its equivalent this year, if the administration's forecast of a 3.8 percent inflation rate is correct, will be $14,820.

Any drop in marginal rates since 1960 was because of tax cuts, including those passed in 1981. Increases were a consequence of inflation, except in 1968 and 1969, when an income tax surcharge was in effect.